Some of the highest capital growth figures in recent years have been seen in the prime property market in London, with 2014 seeing a 11.4% average rise in the price of homes in some of the capital’s most desirable locations. According to the UK Land Registry, areas such as Islington recorded a price growth of 19.2%, with lower figures for locations such as Kensington and Chelsea (13.1%), and the City of Westminster (16.6%). For property investors, the London prime market proved to be a better bet than commodities, outperforming gold and bonds over the same period. However, their report suggests caution for the year ahead. Noting fluctuations in the market over the last three years, with average gains of 12.1% in 2011 and 8.7% in 2012, PropertyWire.com predicts average capital growth of just 5% in 2014.
High Demand for Luxury Rental Properties
The luxury letting market in London has proved attractive to investors because of the high demand for residential property in the UK capital. As one of the world’s leading financial centres, home to 43 universities and more than 8,000,000 residents, the market for rental properties is strong and continues to grow. In 2011 in excess of 20% of Londoners were renting from private landlords, more than double the number that was recorded in 2001. The main factor fuelling this rise in the capital is the restricted supply of new homes coupled with the city’s rising population. This situation means that Buy to Let landlords have a guaranteed market for their property in London, with luxury two-bedroom apartments in the most desirable locations commanding monthly rents in excess of £5000.
Recent years have seen an expansion in the numbers of luxury developments in prime London locations, including the Heron development in the heart of the City of London. This 36-floor residential tower offers residents and investors a landscaped roof garden, a private club and gym, and provides new facilities for the Guildhall School of Music and Drama. The Tower, One St George Wharf is another popular luxury development that has attracted high numbers of property investors. The Tower offers buyers unique views of the city skyline as well as the highest standards of modern living. The planned construction of the £1bn Hertsmere Tower by developer Tom Ryan demonstrates the level of demand at the top end of the London market, with the 75-floor tower providing over 700 apartments close to Docklands in East London. 23ft taller than One Canada Square, the building will be the tallest residential skyscraper in Western Europe.
Diminishing Rental Yields
However, while there is strong demand for luxury homes in the best addresses across London, rising prices means that rental yields have diminished for those investors who Buy to Let. Despite market rents at record highs, the premium attached to prime London property means that rental yields are lowest where prices are high. A survey published by HSBC in April 2013 revealed that the average annual rental yield in Kensington and Chelsea was 3.34%, the worst performing location in the UK for Buy to Let investments. Indeed, prime London locations offer lower rental yields to landlords than most other locations in the UK. Those investors who hope to rely on rental yields for an annual income may prefer to avoid the luxury London market and look for more reasonably priced locations.
The Luxury Market Shows the Strongest Growth
The strongest growth in property prices can be found among London’s most luxurious homes, as prestigious residences continue to attract high levels of foreign cash investors. According to estate agents Savills, the prices for homes that cost more than £1000 per sq ft were 27% higher than their 2007 peak in 2014. Dean Hodcroft, Head of Real Estate at Ernst and Young has noted that demand from the super-rich is so high that prices are likely to keep rising. In situations such as these, where the luxury market behaves more like an investment market than a residential market, it is more likely property investors will purchase homes providing little or no annual rental yields because capital growth rates are so high.
An EY Item Club report published in February 2014 has suggested that the numbers of super-rich buyers in the London market has created bubble-like conditions in the capital, predicting that the average home in London will cost £600,000 by 2018. The ‘trickle-down’ effects of the luxury market boom will cause this increase, as properties located near desirable areas experience rapidly rising prices. If these predictions prove correct, luxury property investors should ensure that they choose the location of their property carefully, selecting prestigious areas where demand is likely to remain high in the long term. Investors should do their research, finding out the number of rental properties available in the location where they choose to buy and avoiding areas where there are a minority of owner-occupiers. The slower price rises in London’s most exclusive areas, such as Kensington and Chelsea, could help Buy to Let investors to maximise average yields over time as rents continue to climb.